This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best …
If you own shares of Corning (NYSE:GLW), today is going to be a bad day.

Over at the nuclear-named analyst house of Oppenheimer & Co., analysts are predicting an early demise to the LCD TV boom, with dire effects up and down the supply line. Oppenheimer says that the "prolonged rebuild cycle that has helped significantly boost LCD panel demand over the last 9 months [will] … likely … peter out in the next couple of months." Now that retailers such as Best Buy (NYSE:BBY), Wal-Mart (NYSE:WMT), and Sears Holdings (NASDAQ:SHLD) have restocked their inventories, they'll likely be buying no more TVs than they need to satisfy ongoing consumer demand, forcing a "reset" in TV shipments as early as next quarter.

Oppenheimer expects to see panel maker AU Optronics get hit worst by the change in dynamics (and downgraded the stock to "underperform"). But this isn't great news for glassmakers like Corning, either. Oppenheimer worries that its fellow Wall Street analysts are viewing 2010's first quarter as a "trough" quarter for the LCD business, when in fact it may turn out to be the very peak of the cycle. Demand will plunge, shipments stall, and Corning's stock will fall.

Is it time to panic?
This all sounds pretty scary, and I can understand why you might think that, but .. no. In my opinion, there's real cause for worry in this downgrade, but there's reason to be optimistic as well.

I'll explain. First, the worry factor: Within the Communications Equipment sector that Corning inhabits on CAPS, Oppenheimer's record looks pretty darn good. And 59% of the time the analyst calls a winner in this space, it performs as planned, as with:

On Corning in particular, Oppenheimer has made two outperform picks in the past year -- one lagged the market marginally, while the other beat the S&P 500's returns by a clean 42-percentage-point margin. All of which suggests that when Oppenheimer tells us Wall Street is in for some nasty "negative surprises" from Corning over the coming months, it's probably right.

Can Corning conserve cash?
But there's good news in today's downgrade as well. For one thing, Oppenheimer points out that Corning stock doesn't look terribly expensive today, selling for just  11 times Oppenheimer's own below-consensus earnings estimate of $1.64 (for fiscal 2010) and 12 times its "worst-case FY10E scenario of $1.53" per share. So while Oppenheimer says the Street is going to be surprised by bad news from Corning going forward, a Fool can wonder if at least some of this bad news has already been priced into the stock.

More importantly though, according to Oppenheimer, the troughing of the LCD TV cycle will allow Corning to retrench and rebuild depleted supply chains, while at the same time "maintaining pricing discipline through periods of volatility." As one of just a "small cadre" of glass suppliers, Corning has at least some ability to control glass supply so as to limit price declines and margin erosion.

To my Foolish eye, this once again raises the holy grail-prospect of Corning's capitalizing on its scale of production and pricing power to generate some real, honest-to-goodness, superior free cash flow. Consider: If demand falls, and the need to make a lot of glass falls with it, what are the chances that Corning will need to lay out multiple billions to build new plants anytime soon? Minimal, I'd say.

Foolish takeaway
If Corning can indeed control its cash outflows, then there's at least a chance that free cash flow can rise to something approaching the level of what Corning claims as its "profits" (as calculated under GAAP). Granted, Corning has inspired similar hopes before -- then dashed 'em. But -- and call me a crazed romantic, call me a Fool -- I just cannot help hoping that at some point Corning will deliver on its potential.

Hope springs eternal.